Warren & Amanda: Cash Flow, Savings, and Tax Within days of graduating from the Edwards School…

Warren & Amanda: Cash Flow, Savings, and Tax

Within days of graduating from the Edwards School of Business, you started work as a financial advisor with a downtown firm. On your first day on the job you had barely figured out where the lunchroom was when your friend Warren Blankfein called and asked you to help him and his spouse with their finances. Warren has been a friend of yours for many years. He finished his post-secondary training three years ago, while you finished your Commerce degree this year. Warren works as a Digital Graphic Designer for a local company, earning $40,500 annually. Warren’s spouse is Amanda Lagarde, and they are both 24 years old. Amanda currently earns $42,000 annually as an administrative assistant – she finished her post-secondary program at the same time as Warren. Amanda and Warren both pay approximately 25% for taxes, Canada Pension Plan (CPP) and Employment Insurance (EI). The couple told you recently that they hoped to start a family, and they are not sure what will happen to their family income at that time. Warren and Amanda both have excellent benefits packages with their respective employers. Warren and his employer each contribute 3.5% of his gross salary into a money purchase pension plan. Amanda and her employer do the same, at 3% each. Regular expenses, including apartment rent, are listed in the table below. The apartment includes access to an activity center, business services, and a 50% reduction to green fees at a nearby golf course. Warren’s car is 3.5 years old and has 55,000 kilometers on it. Small and efficient, the car has been very reliable. Unfortunately, the manufacturer was recently exposed in a major scandal, which has caused the market value of the car to decrease significantly. Warren owes $18,000 on the car but its current market value is approximately $18,500. Amanda’s car is a 6-year old SUV with 150,000 kilometers. The car was doing very well until two months ago, when both the engine and the transmission required repairs. Her mechanic was able to get everything working again but the bill was far larger than expected. Now, with $3,900 less cash, Amanda is wondering what to do about the vehicle. It has a market value of $23,000 and her car loan is currently at $20,000. The couple’s monthly expenses are as follows:

Some monthly expenses:

Car payment, Amanda $           442

Car payment, Warren 398

Charitable donations 100

Clothes 400

Credit card minimum payment 110

Dining out 300

Entertainment/travel 600

Groceries 500

Home internet 65

Interest on line of credit 46

Line of credit minimum payment 230

Mobile phones and data 150

Pets (2 dogs) 250

Rent 1,200

Student loan payments (3 years remaining) 538

Tenant's insurance 150

Utilities (gas, electric, water) 200

Vehicle expenses (gas, insurance, maintenance) 600

Net worth items:

Cash $         750

Chequing account 2,800

Amanda's car, MV 23,000

Amanda's car loan 20,000

Amanda's RRSP 22,421

Credit card balance 5,500

Furniture 6,500

Personal line of credit 11,500

Savings account 1,500

Warren's car, MV 18,500

Warren's car, loan 18,000

Warren's RRSP 25,223

Warren's student loan $    12,524

Most months, Amanda and Warren feel like their cash flow is tight, but they do not understand why. They use credit cards for most purchases and always make at least the minimum required payment, but their balance continues to climb. They would like to get rid of this balance entirely. In addition to credit card debt, they carry a balance on a personal line of credit. They accumulated the balance last summer after taking an extended vacation in Australia. Since the trip, they have been paying only the interest on the line of credit. The couple would like to begin saving at least $300 per month.

Submission: Your submission must be typed and presented professionally, in a manner that would be suitable for distribution to a fee-paying client. Remember that your submission will be graded on not only its content but also on its professionalism – some of you may be dealing with clients, on similar issues, in the very near future. This assignment will be submitted electronically in Blackboard/Course Tools.